Strategic Tax Planning in Business Acquisitions Asset Sales vs Stock Sales
TAX CONSIDERATIONS IN A STOCK DEAL A stock purchase is a complete purchase of a company, including all the assets and liabilities. The selling shareholders experience capital gain or loss based on the difference between the basis of the stock (not the assets) and the sale price. Long-term capital gains on stocks held for the minimum period (one year) are taxed lower than ordinary income. This distinction is key for achieving the utmost tax efficiency in a stock sale or purchase. A notable strategy in stock purchases, especially for S corporations, is treating the acquisition as an asset purchase for federal income tax purposes. Under Section 338(h)(10) of the Internal Revenue Code, this election allows the transaction to be treated as a stock purchase for corporate law purposes while benefiting from asset sale tax treatment for federal taxes. As mentioned above, this usually allows a buyer to benefit from the amortization, barring specific “look through” provisions in some states or foreign territories. Sellers generally find the tax outcomes favorable in stock deals, as these transactions typically result in capital gains or losses. BENEFITS UNDER THE TAX CUTS AND JOBS ACT The Tax Cuts and Jobs Act (TCJA) of 2017 significantly impacted tax strategies in asset purchases. It reduced the top corporate tax rate from 35% to 21%, making corporate-level tax in asset purchases more favorable. Additionally, the TCJA expanded the bonus depreciation rules, increasing the range of transactions that can be structured tax-efficiently as asset purchases.
When businesses engage in the acquisition of another entity, it’s crucial to take the tax implications into account. Those implications look different depending on whether the deal is a stock sale or an asset sale, and working with an experienced firm that understands both tax and business law is an invaluable asset in the acquisition process. TAX CONSIDERATIONS IN AN ASSET DEAL An asset purchase occurs when a buyer purchases some or all of the assets owned by a company but not the company itself. In an asset purchase, the buyer can use the tax basis of the acquired assets, including goodwill, as the purchase price. This adjustment allows tax deductions for the amortization of those assets over the useful lives of the assets, offering tax efficiency. However, it’s essential to note that tangible assets, such as inventory, will likely trigger a tax on the purchaser. Additionally, some states levy a general intangibles tax on transfers. For the seller, depreciation recapture comes into play when an asset is sold at a price higher than its tax basis as adjusted by previously claimed depreciation.
GET A HEAD START ON YOUR LEGACY
INTERVIEW! Scan this QR code to request a FREE copy of our Legacy Interview questions. With
STATE-SPECIFIC CONSIDERATIONS It’s also important to consider state-specific taxes. For
them in hand, you can create a precious gift for your children, grandchildren, and other loved ones that will preserve your memory for decades to come.
instance, California imposes a 2.5% gain at the entity level for S corporations. Such nuances can influence the decision to make a 338(h)(10) election, especially in scenarios where the sale might result in a corporate-level loss. NEGOTIATING TRANSACTION TAXES A critical aspect of acquisition negotiations is deciding who is responsible for various taxes associated with the deal. While one party is legally required to pay the tax, either party can negotiate additional payments or concessions to offset the tax burden. Whether it’s an asset or stock purchase, each approach has distinct tax consequences that can significantly affect the overall financial outcome. Contact the team at Dahl Law Group for a firm with a wealth of experience navigating these complex deals and ensuring that clients can make informed, tax-efficient decisions in business acquisitions.
“Holding on is believing that there’s only a past; letting go is knowing that there’s a future.” –Daphne Rose Kingma
3 tqdlaw.com | 916-545-2790
Published by Newsletter Pro www.NewsletterPro.com
Made with FlippingBook Ebook Creator